Download Fiscal Policy:

Fiscal Policy:
The way the government taxes and
spends money.
In a Recession
• The government spends more money because
consumers cannot
– keep companies running and workers employed.
• Provides money to people and increases
demand.
– Producers will then increase supply.
• Tax cuts
In a Boom
• The government will control peaks by
increasing taxes and decreasing spending.
– Why would they want to control the peak?
• The Roaring 20’s led to the Great Depression
Monetary Policy
The way the government regulates
the amount of money in circulation
• The Federal Reserve (FED) is in control of
monetary policy.
• The FED will control the money supply by
raising or decreasing interest rates for banks.
– Interest rates: the payment on a loan
• The FED has 12 branches (pg 662)
– Does anyone have a $1 bill
• The FED is the central bank of the US
– It is the banker’s bank
• The FED has two policies that they use
– In bad times they use Loose Policy
– In good times they use Tight Policy
Tight Policy
• Interest rates are raised
– Difficult to borrow $
– How do high interest
rates make borrowing
difficult?
– Why would the gov’t
want to make it more
difficult to borrow $ during
the Boom?
Loose Policy
• Interest Rates are lowered
- Easier to borrow $
- How do lower interest
rates make borrowing easier?
– Why would the gov’t
want to make it easier to
borrow $ during Recession?
- WARNING: Can cause Inflation
Inflation
• A decline in the value of money.
• Purchasing power: Amount a dollar can buy.
– What gives money value?
– Candy bar example
• Inflation is measured by the Consumer Price
Index.
http://futureboy.us/fsp/dollar.fsp?quantity=1&currency=dollars&fromYea
r=1953
Consumer Price Index
• Change in price over time of a specific group
of goods and services the average household
uses.
– Each year is compared to the average of 19821984. This makes the base year.
– This tells us the change in the standard of living.
Gross Domestic Product (GDP)
• The total dollar value of all goods and services
produced and sold in the nation during a single year.
– Value is always expressed in terms of the dollar.
– Only new items are counted. Anything bought used is not
counted.
Exports & Imports
• Export: Anything sold to other countries.
• Import: Anything bought from other
countries.
• Net Exports: The difference in what the
nation buys and sells with other countries.
Exports
– Imports
Net Exports
Net Exports Flow Chart
Unemployment
• Unemployment rate:
Percentage of the labor
force without jobs but
actively looking for work.
• Unemployment reduces living standards,
disrupts families, and causes a loss of selfrespect.
• Reaches its height during recession.
Types of Unemployment
• Cyclical: Associated with the ups and downs
of the economy.
• Structural: Changes in the economy based on
technology.
• Frictional: Based on people being terminated
or looking for new jobs.
• Seasonal: Based on
weather.